7/19/2010
By Brian Sozzi, Research Analyst

More Articles by Brian Sozzi

Life for a videogame fanatic (or "gamer" if you are an Xbox Live freak) used to be rather straightforward.  The entire process, provided you were under the age of 16, centered on parents taking time out of their precious weekend to run to Toys R ‘Us, plop down $40.00 at the register for a Nintendo game, and then head back home to watch their child's brain cells die in front of the television.  In a weird way, the venture to Toys R ‘Us was a bonding experience; after buying the latest Zelda parents would go out to lunch with their children.  Granted, children wanted to go home and play the unopened game, but gladly accepted the free McDonalds happy meal and the parent gladly appreciated the moment together.
Unfortunately, these days are becoming extinct, and fast might I add.  Let's run through a more typical day in the life of a sub 16 year old:

* Child wakes up for school, checks the Blackberry instant messenger list.
* Childs begs parent for the latest gadget from Apple (AAPL) on the car ride to school, perhaps sucking down a Red Bull for breakfast.
* Child text messages mom or dad midday asking if he/she could download "Madden NFL" from the iTunes store.
* Child gets no schoolwork done during the day as the time is ruled by the world of social media and text messaging.
* Child comes home and does homework while listening to music on the iPod and watching the Blackberry like a hawk in front of them; concentration level doesn't exist.
* Child goes to bed at midnight, but seems to wake up on cue should the Blackberry messenger jingle go off, indicating a hot message from a friend.

I, for one, am very glad I am not part of this generation of techies.  Do I own a Blackberry, yes.  Am I glued to it, absolutely not.  For videogame makers, in this case the big three, Electronic Arts (ERTS), Activision Blizzard (ATVI), and THQ (THQI), they are having to adjust mightily to the new industry trends.  When children are not downloading apps or games from ITunes, they are consuming gaming content on Facebook or Pogo.  Every dollar spent on online gaming is fewer dollars spent at GameStop (GME) on traditional packaged videogames.

The numbers reported by research firm NPD Group every month support my claims that times are changing for the industry.  Since holiday 2009, videogame sales have been dour, and it's not just a factor of a tighter fist on discretionary spending by household decision makers.  There is an evolution happening right before our eyes in the industry, so much so that in five years I expect packaged games to be nearing a distant memory.  A peek into the future includes:

* Downloading ever more content straight from Microsoft (MSFT) and Sony (SNE) online platforms.  Products could be priced cheaper as companies will have less overhead costs.  Having no internet will mean no gaming unless one is inclined to purchase an older console, which is a sad reality.
* Traditional videogames will be of less importance overall relative to handheld applications of all kinds and social media gaming.
* A thumbs down to consoles such as the Nintendo Wii and interactive attachments altogether.  The point of gaming is to immerse oneself into a virtual world but not break a sweat in doing so.  It's a balancing act to be sure.

In the mean time, I believe the industry will continue to be in for a rocky road ahead.  Don't buy into the hype by gaming executives (especially Activision Blizzard CEO Bobby Kotick, who seems to be on television more than a local news weatherman) that new motion sensor controllers from Microsoft and Sony will create huge demand for consoles for this coming holiday season.  It's simply a fallacy...remember the flops that were Nintendo's Power Glove and Power Pad?  If I am an investor, and I am seeking to park money in the major sector names given their relative underperformance from the market's rally from March 2009, I would be laser focused on the negatives to the investment thesis.  They include:

* Out of control development costs for current console titles and online titles.  For example, Activision Blizzard has spent $100 million to develop Starcraft II, an online MMORPG.
* Lofty premiums needed to be paid to acquire small startup companies that are developing technology for gaming on social media sites.
* Initial costs to spearhead research and development for the next generation of consoles from Microsoft, Sony, and Nintendo which I would expect to learn more about at the 2011 E3 convention.  The current console cycle, which began with the release of the Xbox 360 in 2005, is becoming long in the tooth.

June Sales Overview

* Overall sales: -6% to 1.1 billion
* Hardware sales: +5% to $401.7 million
* Accessories sales: +6% to $169.6 million
* Software sales: -15% to $531.3 million
* Key drivers: exclusive Xbox 360 title Red Dead Redemption (rated a high 95 by Medacritic), continued infatuation with anything that has a Mario Brothers name on it, more attractive price points on hardware and software

Brian Sozzi
Wall Street Strategies